H.K. Builders Fall as Non-Locals Property Tax Imposed

By Vinicy Chan and Kelvin Wong -
Oct 29, 2012

Hong Kong property shares fell the
most in seven months after the government imposed a tax on
overseas homebuyers to deter capital inflows and reduce the risk
of a bubble in the world’s most expensive housing market.

The property gauge had jumped 30 percent this year before
today, almost double the gain in the broader Hang Seng Index (HSI), as
record-low interest rates and inflows spurred by U.S. monetary
easing drove home prices to a record. Hong Kong Chief Executive
Leung Chun-ying is implementing his third set of property curbs
in two months, after tightening mortgage requirements and
boosting the supply of land for developers as the boom triggered
protests over a widening wealth gap.

“There’re a lot of worried investors out there,” said
Adrian Ngan, a Hong Kong-based analyst at Citic Securities
International Co. “Some worry that if these measures work,
they’ll hurt property sales. Some worry that if they don’t work,
it’ll prompt more measures from the government.”

Non-local and corporate buyers will have to pay a 15
percent tax upon purchase, Financial Secretary John Tsang told
reporters at a press conference on Oct. 26. The government also
raised a resale tax on property by about 5 percentage points and
extended the period during which it will apply to three years
from two.

New World Development Co., the best performer in the
property index this year, dropped 6.4 percent.

Residency Status

Record low mortgage rates, an influx of buyers from other
parts of China and a lack of new supply have been underpinning
the Hong Kong property market, prompting Leung, who was sworn in
as the city’s leader in July, to accelerate land sales and give
preference to local buyers in some projects.

The 15 percent tax “will be effective in curbing foreign
demand - mostly from mainland buyers - and avoiding ‘hot money’
influx into the property market,” Alfred Lau, a Hong Kong-based
analyst at Bocom International Holdings Co., wrote in a report
today. “However, local demand is not affected.”

The new property tax doesn’t apply to Hong Kong permanent
residents. Inhabitants need to live in the city for seven
straight years to be eligible for permanent residency, according
to immigration rules, while Chinese citizens born in the city
are automatically granted that status.

Sales Forecasts

Property owners, who sell their homes within six months of
their purchase, will need to pay a 20 percent special stamp
duty, up from 15 percent, Tsang said. For resale between seven
months and 12 months, the duty will increase to 15 percent, and
transactions between 13 months to 36 months, the duty will be 10
percent.

“The current housing supply lags behind the soaring
demand; we need to work on the demand-side measures,” Tsang
said. “These measures target specifically property investors
who resell the flats within three years, but not the genuine
end-users.”

The measures will stabilize prices while reducing supply,
Midland’s Executive Director Vincent Chan said in a press
statement released by the company on Oct. 27. Chan predicted new
property transactions will fall to around 14,000 to 15,000 next
year compared with earlier projections of 18,000. Second-hand
transactions may drop to 63,000 from previous estimates of about
70,000, Chan said.

Weekend Sales

Sales of 12 used homes were recorded at the city’s 10
largest estates over the weekend, the lowest level in four
months and down 43 percent from the previous weekend, Centaline
Property Agency Ltd. said in an e-mailed statement yesterday.

The surge in Hong Kong’s property prices is out of sync
with the economy where exports and retail sales have been
declining, Tsang said.

“The low-interest rate environment will likely continue
and Hong Kong property prices are likely to climb,” he said.
“The property bubble is likely to increase the risks” to the
economy and people’s livelihoods, he said.

Today’s loss cut the gain in the Hang Seng Property Index
this year to 25 percent. The benchmark Hang Seng Index has risen
17 percent this year.

“It’s time to sell” property stocks, Andrew Lawrence,
Hong Kong-based analyst at Barclays Plc, wrote in an Oct. 27
report after the announcement. “The government has finally
become serious about demand-side measures.”

Non-local buyers account for 19.5 percent of total sales of
first-hand properties in Hong Kong in 2011 and 6.8 percent of
total sales of second-hand properties in 2011, Tsang said.

Mortgage Tightening

Hong Kong’s central bank tightened mortgage lending on
Sept. 14 after saying the Fed’s latest quantitative easing risks
pushing up home prices that have already surpassed their October
1997 peak. That marked the start of a 70 percent decline to
August 2003, according to an index compiled by Centaline. They
have soared more than 240 percent since that trough nine years
ago.

Leung said on Sept. 6 he will restrict homebuyers of two
building sites the government plans to sell to local residents,
a week after announcing a 10-point package to rein in prices
including making more land available to developers and speeding
up the building of public housing.

Chinese Buyers

Hong Kong home prices have risen 18 percent this year,
according to the Centaline index. They fell 4 percent in the
last three months of 2011, the biggest quarterly drop since the
global credit crisis, after mortgage restrictions and as China’s
economy began to slow.

Buyers from other parts of China made up 31.2 percent of
all new sales by value in the third quarter, down 19.8
percentage points from a year ago, according to Centaline. The
proportion reached 53.9 percent in the third quarter last year,
according to Midland.

“These measures will be effective in reducing the number
of transactions, but ineffective in curbing the property
prices,” said Cusson Leung, a Hong Kong-based property analyst
at Credit Suisse Group AG. “The non-local buyers’ stamp duty is
more of a PR stunt as it responds to Hong Kong homebuyers’
demand to raise the barrier for foreign investors.”

The city’s home prices are 65 percent higher than Tokyo’s,
the world’s second-priciest place to buy a home, according to a
study by Savills Plc (SVS) published last September that compares
prices in 10 global cities including New York and London.

The number of home transactions in Hong Kong fell 9.7
percent in September from a month earlier, according to Land
Registry figures. In August, they jumped 42 percent from July,
the biggest increase since March.